Telcos, pharma companies leading recovery in Sensex
NEW DELHI: India’s stock market benchmark, the BSE Sensex, closedat37,020onJuly17. The index, which crashed 38% till 23 March 2020 from its all- time high close on 14 January because of concerns over the spread of Covid-19, has rebounded significantly since. The Sensex has risen by around 41 % until July 13 from 25,981 points on March 23.
Which industries have contributed to this rebound ?
An analysis of the weightage of companies listed in the index on March 23 and July 13 can help us understand and get a clearer picture of the sectors that have contributed to this rise.
The Sensex is a value-weighted index. This means that it assigns a weight to each company in the index based on its floating market capitalisation. Floating market capitalisation for a stock in the index is calculated by multiplying the total number of shares of the company that are readily available for trading in the market with the company’s share price. Therefore companies with a larger market capitalisation have higher weightage in the index and have more influence on the index.
An HT analysis of index companies’ weightage between March 23 and July 13 shows that while companies engaged in the telecom business,information technology and the pharmaceutical industry have gained the most, banking and housing finance sector companies have suffered the most.Reliance Industries Limited has seen the biggest gain in its weightage in the current equity index composition.
With new foreign investments from around a dozen investors for around 25% stake in its telecom arm Jio, the oil-to-retail and telecom conglomerate has seen its weightage increase by over 5 percentage points in the equity index. (See Chart 1)
The analysis shows that 60 % of companies (18) in the index have lost their market weightage between March 23 and July 13. Housing Development Finance Corporation , ICICI Bank and State Bank of India have seen the biggest loss in their index weights as a moratorium on loan repayments, inability to take defaulting companies to the bankruptcy court. Companies engaged in important sectors like- packaged foods, construction activities and electric utilities that employ a large number of blue collar workers have seen their index weightage declines.
WHAT DOES IT SHOW?
This depicts that the current Sensex rally is fuelled by a limited number of companies in the index. These companies, due to their rising prices (resulting in higher market capitalisation, and thereby higher weightage) have a greater influence on the current index momentum.
To be sure, while March 23 was the worst closing for the Sensex in the last three years, the benchmark had started declining before that and lost around 32 % since the beginning of March.
With physical movement being limited because of the spread of Covid-19, an increasing number of activities are being conducted using telecom and IT infrastructure like -- work from home, online education and so on
The race for Covid medication has also increased investor interest in pharma companies.
While share prices of companies in these sectors have risen between March 2 and July 13, the falling share prices of companies in other important sectors indicates that a majority of companies in the economy are still struggling due to the demand hit caused by the Covid -19 pandemic. (See chart 2)